Flat pricing boxes in Smurfit

Investors in Smurfit-Stone Container Corp. aren't sticking around to see whether the corrugated box maker can deliver on its predictions of rising sales and profits in the second half of 2005.

Investors in Smurfit-Stone Container Corp. aren't sticking around to see whether the corrugated box maker can deliver on its predictions of rising sales and profits in the second half of 2005.

Smurfit's stock has fallen about 42% since the beginning of the year and closed Friday at a 52-week low of $10.74.

The selloff accelerated in May when it became apparent that industrywide price hikes weren't sticking. Instead of rising about 10%, prices on the thick paper used to make corrugated containers slipped as inventories of boxes inched higher.

So much for assumptions that demand for corrugated containerboard would continue to rise through 2005 following a 3.5% increase in box shipments last year.

"The fear is that if pricing power starts to deteriorate and there is a slowdown in manufacturing in the second half, it could really cause problems for (corrugated) producers," says Steve Hansen, an analyst with Chicago-based Morningstar Inc.

Prices in June recovered from May's decline but are roughly flat with levels from June 2004. Still, prices remain the best seen in the corrugated business since 2000.

Nevertheless, Smurfit-Stone has had difficulty cashing in, despite being the corrugated industry leader, with about 20% of the market. Last year, sales rose 7.3% from 2003 to $8.29 billion, but the company lost $57 million, vs. a loss of $208 million in 2003. While that was an improvement, the company lost another $19 million in the first quarter of 2005, despite nearly 8% growth in sales to $2.09 billion.

CUTS TO COME

Rising production costs for energy, chemicals, transportation and wood fiber have squeezed profit margins, and onerous interest expenses of more than $340 million a year have wiped out any profits from rising sales.

"Our highest financial goal is to reduce debt," says a company spokesman. "It's been tough for us or anyone else to go out and recover our costs. We're looking at what we can do to cut costs."

However, the company has no immediate plans to close down plants or lay off workers, the spokesman says. Smurfit-Stone and other producers have closed plants, idled papermaking machines and consolidated operations in recent years to combat excess production capacity that's kept corrugated prices and profits anemic.

Despite those moves, an exodus of North American manufacturing to low-cost foreign locations and retailers' reduced reliance on corrugated cartons have contributed to the capacity glut.

However, analysts are divided over whether to buy, hold or sell the stock. Given the cyclical nature of the paper industry, some consider the plunge in Smurfit-Stone's stock to be a buying opportunity.

"Sometimes you have to buy a stock when the business isn't great," says Steven Chercover, senior research analyst for D. A. Davidson & Co. of Montana.